Estimation and Simulation of a Financialized Growth Regime with a Stock Flow

Consistent Model

L. REYES, J. MAZIER, M. CLÉVENOT, Y. GUY

Stylised Facts.

The Model.

Econometric Results.

Simulations.

Some stylised facts

The next structural crisis ?

An important increase of real interests rate at the beginning of the eigthies

The marginal role played by equities in the financing of physical investment (5% avg. in the long-run)

A «stabilisation» of the global financial burden with a transformation in the channels

Relevant symmetry between liabilities and assets ratios due to valuation effects

Financial Profitability

The Model

The Model (1)

The Model (2)

The Model (3)

Econometric Results

Econometric Results (1)

All series come from INSEE and Banque de France.

Period under study: 1980(1) – 2009(4)

Vector Autorregressions, rigorously tested.

Medium- to long-term relationships.

Annual capital (as stock and as flow) was brought to quarters using the Denton (1971) technique.

Econometric Results (2)

Accumulation depends positively on the rate of profit (EBE/pkK-1) and capacity utilization (u).

Accumulation is negatively influenced by the debt ratio (L/pkK) and the real long-term interest rate (r).

The rate of return on equities held is calculated as in Godley and Lavoie, 2001: ree = (Ee-1Δpe+RD)/(peEe)-1

ree has rendered capital more, rather than less, expensive.

Econometric Results (3)

Financial accumulation is positively determined by the profit rate, financial profitability and the debt ratio.

If the cost of debt (r) diminishes, this in turn encourages indebtedness by discouraging financial accumulation (r is here fully exogenous).

Difficult to estimate. Still, rigorously tested and consistent.

Econometric Results (4)

The debt ratio depends positively on the profit rate (a source of cyclical fluctuations in our model, since the profit rate also encourages fixed capital accumulation, and this in turn depends negatively on debt).

Financial profitability encourages higher debt levels.

The cost of debt has an obvious negative effect on this ratio.

Econometric Results (5)

An “own funds” norm is the ratio of issued equities to total accumulation: peE / (pkK + peEe)

A higher cost of debt (r) decreases external funding (debt) as it increases internal funding (own funds).

Higher debt increases own funds (a source of instability).

Higher financial profitability diminishes own funds.

Simulations

Simulations (1)Two alternative closures:

Model 1: with an indebtedness norm. Model 2: with an own funds norm.

Shocks on the demand side: Consumption Wage share Accumulation rate

Shocks on the financial side: Rate of financial accumulation Household’s demand for equities

Simulations (2)

Model 1. Indebtedness norm: Exhibits financial cycles as a normal mode of

regulation. Equities issued as a residual. The price of equities clearing the market.

Model 2. Own funds norm: Financial bubble with increasing financial

accumulation and rising equities’ prices Debt ratio increasing. No stabilizing mechanism.

Simulations (3)

With an indebtedness norm, we “shock” the consumption function.

Simulations (4)

Now, we shock the same function with an own funds norm.

Simulations (5)

Accumulation rate under an indebtedness norm.

Simulations (6)

Shock on fixed capital accumulation under an own funds norm.

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